A Trial balance is a measure designed to see if all the transaction entries over the course of an assessed accounting period add up. If they don’t, then it’s a big nuisance for everyone.
Trial balances of all sorts are done as a security measure. Without it, you can’t really be sure that your credited and debited accounts add up correctly. In short, while compiling the Trial balance, accountants check if all the deals done over this period are closed, so your paperwork is accurate and up-to-date.
Post closing trial balance is one of the variations. Its key aspect is that it’s done after the period is closed, hence the name.
Trial balance explained
Trial balance is an audit measure over the course of which an accountant has to go through all entries created over the course of a reported period and check them. The goal of this review is to guarantee that neither sort of account is bigger than the other.
If that’s the case, the difference between your debit and credit must be 0. This may not be so, of course. However, it’s desirable that your debit and credit accounts add up in the end.
If it is 0, it basically means you have done your accounting correctly. If you leave some temporary accounts opened into the following period, it’s going to skew the financial reports and make them less accurate.
In the end, this measure is also a good way of checking whether the reports made during the previous financial period are true and up-to-date. If they aren’t, Trial balances can adjust the information so that each debit entry is balanced out by a credit entry.
Post-closing trial balance explained
This is a sort of Trial balance conducted when the financial period is already closed. Usually, the Post-closing trial balance is compiled some time after the period has finished practically.
Doing accounting after all the entries and transactions have already happened in the monitored period is good because it means there won’t be any new news for this span of time. It’s historical data, which is, even so, critical for keeping tabs on the financial state of business.
Without correct information on all transactions, you can’t really create financial statements for the period. The Balance Sheet, therefore, can’t be finalized, which would obviously be disastrous.
Example of a Post-closing trial balance
Every time a business completes a transaction of any sort, an entry needs to be created for debit and credit accounts. Usually, both sorts are accommodated on the same sheet with four columns (from left to right):
- Account number
- Name of an account
- Debit
- Credit.
One account can only be either debited or credited, but for each debit account, there’s bound to be a credit counterpart because that’s how accounting works. For instance:
The XYZ Company buys tools for its production line. Credit-wise, they spent $30,000 on tools. Debit-wise, they acquired assets (tools) worth $30,000.
That’s how it works with almost anything in accounting. If you spend money on something, you gain the same value in assets, however much these actually may be worth. It’s subjective. The objective truth is that you spend money on this stuff, therefore, it’s worth exactly this amount of money.
If it turns out your debit amount is bigger than your credit amount when the period runs out, it means there’s been a technical mistake. If all the entries are represented properly, it’s impossible for this to happen.
What’s special?
Other than the timing, what’s so special about this sort of Trial balance?
Well, the most notable difference is that the post-closing type of Trial balance doesn’t account for losses, gains, revenues & expenses. These are temporary accounts, and they’ve already made it into the ‘Retained earnings’ section at this stage. Therefore, this sort of Trial balance mustn’t have any unnoticed temporary accounts.
The main purpose of PCTB, as you know, is to make sure the credits and debits are balanced, and it’s the last effort before closing the reported period for good. Unlike the usual Trial balance, there are no unadjusted or adjusted variations, it’s all done in one go. At the end of the day, they all serve one purpose – to ensure everything in the ledger is accounted for properly.